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Brokers forecast 2005 commercial office market

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Where will office vacancy rates in San Diego County be at the end of 2005? Some local brokers have offered a few ideas.

This year, the downtown San Diego office market will see a new 360,000-square-foot office building in Lankford & Associates' Broadway 655 development. The project is around 50 percent pre-leased. Brian Walsh, of the Walsh Chacon commercial brokerage firm, said he doesn't think leasing the rest will be a problem.

"I think Lankford will definitely affect the market in a positive way," Walsh said.

Walsh said he likes the fact that Gray Cary, which has merged with Baltimore-based Piper Rudnick, has increased its presence in the Wells Fargo Plaza office tower. That building sold to the Irvine Co. for about $147 million last fall.

While there is not nearly as much churning of office space as he has seen in past years, Walsh said all the buildings changing hands has definitely changed the dynamics of downtown.

"Southwest Value Partners (which had owned Emerald Plaza, the Golden Eagle Plaza at 525 B St. and the Comerica Bank Building until last fall) pushed the envelope on pricing. They tried to get top dollar. The fact that they're out of downtown will leave a little money on the table," Walsh said. "They were very tough to negotiate with."

While downtown hasn't seen the $3 rents, Nelson Ackerly, a CB Richard Ellis vice president, said the rent growth downtown has been nothing short of staggering, which could explain why some spaces are empty, including the space in Lankford's tower.

"Things have been a little bit slow there," Ackerly said.

Walsh said if there is anything that bothers him about downtown it is that up until a year ago, spaces from 5,000 square feet to 15,000 square feet weren't available. Now, there are such spaces in buildings such as Emerald Plaza, which with 73,804 square feet available out of 356,901 square feet, has about a 20 percent vacancy rate.

Walsh said the downtown office market is still unsettled enough that while Cisterra Partners has reportedly gotten its funding, he won't be convinced the 325,000-square-foot office project is a reality until he actually sees a shovel in the dirt. Cisterra has said it intends to put that shovel in during the first quarter of this year.

Andy LaDow, a Grubb & Ellis/BRE broker, seems more confident about that project.

"It looks like DiamondView Tower is on," LaDow said.

Cisterra officials could not be reached for comment Tuesday.

As for the downtown office vacancy, Walsh said it is running about 10 percent, and predicted it will be slightly higher by the end of 2005.

In Mission Valley, LaDow said two office buildings off Friars Road, Rio San Diego Phase II and Rio Vista Plaza will at least temporarily increase what has been about a 9 percent office vacancy. These buildings will be completed in the April to June timeframe.

"They should be at least 50 percent occupied when they open," LaDow said.

LaDow is marketing a proposed 142,000-square-foot building by Rreef Funds that is to be constructed on Pacific Heights Boulevard in Sorrento Mesa. That building is supposed to be started in the middle of this year, with completion tentatively slated for July 2006. This is in a market that had a vacancy rate that exceeded 20 percent less than a year ago.

"We'll be beating anybody out of the ground and the timing ought to be just about perfect," LaDow said.

LaDow, who said the current office vacancy in Sorrento Mesa is in the 15 percent to 16 percent range, said there are development rights for two more buildings in Sorrento Mesa, but that there won't be much room left to build after that. He predicts the vacancy will finish this year at about 10 percent.

Walsh, who put the Sorrento Mesa vacancy at closer to 20 percent, said it remains a fairly stagnant market, and suggested that the occupancy numbers would have to look significantly better before another building could be justified. He added, however, that the November passage of Proposition 71, a $3 billion measure for stem cell research, may breathe new life into a market still trying to recover from the "tech wreck."

"It looks like UCSD will get a lot of money, so that could make a big difference," Walsh said.

Walsh said Del Mar Heights is the Lazarus market -- back from the dead; Kearny Mesa is proving to be San Diego's affordable alternative and Carlsbad is stronger than a posted 14 percent vacancy rate would indicate. Basically, one vacant 220,000-square-foot building on Faraday Avenue has skewed the figure there.

Walsh predicts Carlsbad will finish 2005 with a vacancy rate of less than 10 percent.

"Carlsbad has strong tenant demand," said Walsh. "It is a shining star."

Research:

Find more articles about Lankford & Associates, Walsh Chacon, CB Richard Ellis, Grubb & Ellis/BRE

SourceBook: Commercial Real Estate Firms

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